UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
FormFORM 10-Q
(Mark one)(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998.
ORMarch 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
.
Commission File NumberCOMMISSION FILE NUMBER: 0-24277
Clarus Corporation
-------------------------------------------------CLARUS CORPORATION
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
DelawareDELAWARE 58-1972600
- ------------------------------- ------------------------------------------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
39503970 Johns Creek Court
Suite 100
Suwanee, Georgia 30024
------------------------------------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip code)
(770) 291-3900
------------------------------------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
SQL Financials International, Inc.
------------------------------------------------------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
_--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock,COMMON STOCK, ($.0001 Par Value)
------------------------------------------
10,605,870 shares outstanding as of November 6, 1998PAR VALUE)
10,947,425 SHARES OUTSTANDING AS OF MARCH 31, 1999
INDEX
- -----
CLARUS CORPORATION
PART I FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) -
September 30,
1998March 31, 1999 and December 31, 1997;1998;
Condensed Consolidated Statements of Operations (unaudited-Three
months and nine(unaudited) -
Three months ended September 30, 1998March 31, 1999 and 1997;1998;
Condensed Consolidated Statements of Cash Flows (unaudited)-Nine -
Three months ended September 30, 1998March 31, 1999 and 1997;1998;
Notes to Condensed Consolidated Financial Statements
(unaudited) - September 30, 1998March 31, 1999
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk -
Not Applicable
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Legal proceedings.
Item 2. Changes in Securities and Use of Proceeds.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
2
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ItemITEM 1. Financial StatementsFINANCIAL STATEMENTS
CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands, except share and per share amounts)
September 30, December 31,
1998 1997
----------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 23,984 $ 7,213
Trade accounts receivable, less allowance for
doubtful accounts of $484 and $338 in 1998
and 1997, respectively 10,918 4,050
Prepaid and other current assets 407 494
------ ------
Total current assets 35,309 11,757
PROPERTY(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND EQUIPMENT - net 2,227 1,507
OTHER ASSETS:
Intangible assets, net of accumulated
amortization of $1,758 and
$1,127 in 1998 and 1997, respectively 5,843 1,267
Deposits and other long-term assets 215 150
------ ------
Total other assets 6,058 1,417
------ ------
TOTAL ASSETS $ 43,594 $ 14,681
==========PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
1999 1998
---------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,418 $ 14,799
Trade accounts receivable, less allowance for doubtful
accounts of $434 and $401 in 1999 and 1998, respectively 10,974 8,998
Prepaid and other current assets
729 553
----------- -----------
Total current assets 22,121 24,350
PROPERTY AND EQUIPMENT - net 4,430 3,454
OTHER ASSETS:
Intangible assets, net of accumulated amortization of
$2,397 and $1,967 in 1999 and 1998, respectively 11,583 11,963
Deposits and other long-term assets
175 315
----------- -----------
Total other assets
11,758 12,278
----------- -----------
TOTAL ASSETS $ 38,309 $ 40,082
=========== ===========
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
ItemITEM 1. Financial Statements (continued)FINANCIAL STATEMENTS (CONTINUED)
CLARUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (continued)
(in thousands, except share and per share amount)(UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNT)
September 30, DecemberMARCH 31, DECEMBER 31,
1999 1998
1997
------------- ----------------------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Note payable, net of discount of $110 in 1998 $ 990 $ -0-
Accounts payable and accrued liabilities 6,778 4,598
Accounts payable-related party -0- 54$ 6,632 $ 7,426
Deferred revenue 6,415 5,7177,826 7,397
Current maturities of long-term debt
244 1,841
------ ------445 526
----------- ----------
Total current liabilities 14,427 12,21014,903 15,349
NONCURRENT LIABILITIES:
Deferred revenue 3,600 4,4802,208 2,302
Long-term debt, net of current maturities 310 49798 245
Other non-current liabilities
70 49
------ -----219 75
----------- ----------
Total liabilities 18,407 17,236
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY -0- 243
------ ------
REDEEMABLE CONVERTIBLE PREFERRED STOCK: -0- 25,11217,428 17,971
STOCKHOLDERS' EQUITY (DEFICIT) (Note 3):EQUITY:
Common Stock, $.0001 par value; 25,000,000 and
9,000,000 shares authorized in
19981999 and 1997,
respectively; 9,197,3121998; 11,022,425 and 1,467,16011,002,508 shares outstanding in
19981999 and 1997,1998, respectively 1 01
Additional paid in capital 51,306 48961,424 61,393
Accumulated deficit (26,918) (28,019)(40,024) (38,721)
Warrants 1,440 65240 40
Treasury stock, at cost (2) (2)
Note from stockholder 0 (612)
Deferred compensation (640) (418)
-------- --------(558) (600)
----------- -----------
Total stockholders' equity (deficit) 25,187 (27,910)
-------- --------20,881 22,111
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 43,59438,309 $ 14,681
======== ==========40,082
=========== ===========
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
ItemITEM 1. Financial Statements (continued)FINANCIAL STATEMENTS (CONTINUED)
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share amounts)(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended Nine months ended
September 30 September 30
-------------------------- --------------------------THREE MONTHS ENDED
MARCH 31
----------------------------
1999 1998
1997 1998 1997
REVENUES:
License fees $ 5,6233,659 $ 4,299 $ 14,066 $ 9,0263,630
Services fees 4,387 2,064 11,277 5,3405,502 3,052
Maintenance fees 1,937 1,250 5,351 3,168
----- ----- ----- -----2,240 1,599
----------- ----------
Total revenues 11,947 7,613 30,694 17,53411,401 8,281
COST OF REVENUES:
License fees 960 478 1,525 856346 260
Services fees 2,717 1,366 7,223 3,6883,319 2,131
Maintenance fees 925 510 2,442 1,360
----- ------ ------ -----1,031 681
----------- ----------
Total cost of revenues 4,602 2,354 11,190 5,9044,696 3,072
OPERATING EXPENSES:
Research and development 1,630 1,481 4,157 5,3052,194 1,143
Sales and marketing 3,029 2,354 8,419 6,9583,373 2,487
General and administrative 1,175 754 3,723 2,1031,619 1,357
Depreciation and amortization 526 352 1,456 1,049871 404
Non-cash compensation 38 13 842 36
----- ----- ------ ------42 53
----------- ----------
Total operating expenses 6,398 4,954 18,597 15,4518,099 5,444
OPERATING INCOME (LOSS) 947 305 907 (3,821)LOSS (1,394) (235)
INTEREST INCOME 243 1 402 28117 30
INTEREST EXPENSE 51 133 172 25126 60
MINORITY INTEREST -0- 133 36
322
----- ------ ----- ------------------ ----------
NET INCOME (LOSS)LOSS $ 1,139(1,303) $ 40 $ 1,101 $ (4,366)
===== ====== ===== =======
Income (loss)(301)
=========== ==========
Loss per common share:
Basic $ 0.12(0.12) $ 0.03(0.20)
Diluted $ 0.22(0.12) $ (3.15)
Diluted 0.11 $ 0.01 $ 0.13 $ (3.15)(0.20)
Weighted average shares outstanding
Basic 9,123 1,390 5,080 1,38410,947 1,539
Diluted 10,039 6,595 8,767 1,38410,947 1,539
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
ItemITEM 1. Financial Statements (continued)FINANCIAL STATEMENTS (CONTINUED)
CLARUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)(UNAUDITED)
(IN THOUSANDS)
Nine months ended
September 30
--------------------------THREE MONTHS ENDED
MARCH 31
--------------------------------
1999 1998
1997
----------- ------------------------- ---------------
OPERATING ACTIVITIES
Net income (loss)loss $ 1,101(1,303) $ (4,366)(301)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,456 1,049887 390
Minority interest in subsidiary -0- 36 322
Amortization of debt discount 55 18-0- 14
Deferred compensation 842 4642 53
Loss on disposal of property and equipment 26 -0-
Changes in operating assets and liabilities:
Accounts receivable (6,867) (3,073)(1,976) 643
Prepaid and other current assets 87 (110)(176) (201)
Deposits and other long-term assets (63) 28140 (28)
Accounts payable and accrued liabilities 2,051 1,721(794) (361)
Deferred revenue (181) 1,091335 (1,362)
Other noncurrentnon-current liabilities 21 (22)
---------- --------144 8
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,462) (3,296)(2,675) (1,109)
INVESTING ACTIVITIES
IncreasePurchases of property and equipment (1,509) (515)
Purchases of intangible assets (709) (90)-0- (150)
Purchase of minority interest in subsidiary (326) -0- Additions to property and equipment (1,551) (557)
------------ --------(62)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,586) (647)(1,509) (727)
FINANCING ACTIVITIES:
Repayments of long-term borrowings (228) (118)
Proceeds from issuance of redeemable convertible preferred stock -0- 150
Proceeds from issuance of common stock 31 12
Dividends paid to holder of minority interest -0- (241)
(190)
Repayment of note receivable from holder of
minority interest -0- 38
Proceeds from notes payable and short term
borrowings 1,645 29,802
Repayments of notes payable and short term
borrowings (3,428) (30,225)
Proceeds from the exercise of warrants 612 10
Proceeds from issuance of common stock, net 22,081 -0-
Proceeds from issuance of preferred stock 150 5,987
--------- ------------------ -------------
NET CASH PROVIDED BYUSED IN FINANCING ACTIVITIES 20,819 5,422
------- -----
INCREASE(197) (197)
----------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS 16,771 1,479(4,381) (2,033)
CASH AND CASH EQUIVALENTS, beginning of period
14,799 7,213
3,278
-------- ------------------ ------------
CASH AND CASH EQUIVALENTS, end of period 23,984 $ 4,757
========= =======10,418 $ 5,180
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 12326 $ 259
========= ===========60
============ ============
See Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Clarus
Corporation (the "Company") have been prepared in accordance with Generally
Accepted Accounting Principles for interim financial information and
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information in notes required by Generally Accepted
Accounting Principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the unaudited financial statements for this interim
period have been included. The results of the interim periods are not
necessarily indicative of the results to be obtained for the year ended December
31, 1998.1999. These interim financial statements should be read in conjunction with
the Company's audited consolidated financial statements and footnotes thereto
included in i) the Company's Prospectus dated May 26,Form 10-K for the fiscal year ended December 31, 1998,
filed under Form S-1
(Registration No. 333 - 46685) with the Securities and Exchange Commission, and
ii) the Company's Prospectus dated October 28, 1998, filed under form S-4
(Registration No. 333 - 63535) with the Securities and Exchange Commission.
NOTE 2. EARNINGS PER SHARE
Basic and diluted net income (loss) per share was computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share," using
the weighted average number of common shares outstanding. The diluted net loss
per share for the nine monthsthree month periods ended September 30, 1997,March 31, 1999 and 1998, does not
include the effect of common stock equivalents, including redeemable convertible
preferred stock, as their effect would be antidilutive.
Diluted net income per share7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Clarus Corporation develops, markets, licenses, and supports Web-based
applications for the quarters ended September 30, 1998managing operational resources together with financial and
1997, and the nine months ended
September 30, 1998, includes the effect of common stock equivalents.
NOTE 3. STOCKHOLDERS' EQUITY
On May 26, 1998, the Company completed its initial public offering of 2.5
million shares of its common stock at an offering price of $10.00 per share (the
"Offering"). The proceeds, net of expenses, from this public offering of
approximately $22.0 million were placed in investment grade cash equivalents.
Immediately priorhuman resources applications for mid- to the effective date of the Company's Registration Statement
the redeemable convertible preferred stock was converted to common stock.
NOTE 4. ACQUISITION OF MINORITY INTEREST IN THE SERVICES SUBSIDIARY
On February 5, 1998, the Company purchased the 20% interest in SQL Financial
Services, LLC (the "Services Subsidiary") from Technology Ventures, LLC
("Technology Ventures") a related party controlledlarge-sized companies. Our applications
create high lifetime value by Joseph S. McCall, a
director of the Company. In exchange for the 20% interest in the Services
Subsidiary, the Company issued 225,000 shares of common stock to Technology
Ventures and granted Technology Ventures a warrant to purchase an additional
300,000 shares of common stock at a purchase price of $3.67 per share. The
warrant expires on February 5, 2000. In addition, the Company agreed to pay
Technology Ventures the sum of $1.1 million due February 5, 2000, pursuant to a
non-negotiable, non-interest-bearing subordinated promissory note. Technology
Ventures has agreed not to sell any of its shares for a period of 180 days after
the effective date of the Offering. The Company also agreed to pay Technology
Ventures a monthly sum equal to 20% of the net profits of the Services
Subsidiary until the completion of the Company's Initial Public Offering.
The Company as additional purchase price recorded payments made to Technology
Ventures for this 20% of net profits of the Services Subsidiary atdelivering sophisticated functionality, while
substantially reducing the time of
payment.
7
CLARUS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5. MERGER OF ELEKOM CORPORATION
On November 6, 1998, the Company completed its acquisition of Elekom Corporation
("Elekom")required for approximately $15.7 million, consisting of $8.0 million in cashimplementation, maintenance, and
approximately 1.39 million shares of the Company's common stock. Elekom was
merged with and into Clarus CSA, Inc., a wholly owned subsidiary of the Company
and the separate existence of Elekom ceased. Immediately following consummation
of the merger, the former holders of Elekom common and preferred stock (the
"Elekom Shareholders") owned approximately 13% of the outstanding common stock
of the Company. The former Elekom Shareholders have agreed not to sell any of
their shares of the Company's common stock for a period ending on August 6,
1999. The Company, as additional purchase price, recorded i) payments of
$500,000 made to fund the operations of Elekom from October 1, 1998, through the
closing date, and ii) expenses of approximately $750,000 to complete the merger.
Approximately $14.0 million of the purchase price was recorded as purchased
in-process research and development. These interim financial statements should
be read in conjunction with the Company's Prospectus dated October 28, 1998,
filed under form S-4 (Registration No. 333-63535) with the Securities and
Exchange Commission.
NOTE 6. LEGAL PROCEEDINGS
The Company is subject to claims and litigation in the ordinary course of
business, including, but not limited to, a lawsuit recently filed against the
Company alleging patent infringement, but does not believe based on its current
assessment of such claims and litigation that any such claim or litigation will
have a material adverse effect on its consolidated financial position.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Clarus Corporation (the "Company") was formed in November 1991 to develop,
market, license and support financial applications.upgrades.
During 1998, and 1997 the
Companywe introduced a series of additional modules and product enhancements.
Specifically, in the third quarter of 1998, the Companywe introduced its Corporate
Service Applications,our Web-commerce
applications, which include E-procurement,E-Procurement, a business-to-business buy
side web basedbuy-side
Web-based solution designed for the acquisition of non-industrial goods and
services; and budgeting. In the first quarter of 1997, the Company introduced
its human resource applications, which included the Personnel, Benefits and
Payroll modules. In 1997, the Company introduced its Financial Statement
Accelerator module, a distributed management reporting solution,services, Clarus Budget, and a 32-bit version of its financial applications (the "Denver Release"), which included two
new modules, Purchasing Control and Solution/Graphical Architect. The Company
intends to release a 32-bit version of itsour human resources
applications by the
end of 1998. The Companyapplications.
We currently markets itsmarket our products in the United States and Canada through itsa
direct sales force, and haswe have licensed its client/serverour applications to more than 250289
customers in a variety of industry segments, including insurance, financial
services, communications, retail, printing and publishing, transportation, and
manufacturing. The CompanyWe also offersoffer fee-based implementation, training and upgrade
services, and ongoing maintenance and support of itsour products for a 12-month to
three-year renewable term.
On November 6, 1998, the Companywe completed itsthe acquisition of ElekomELEKOM Corporation
("Elekom"ELEKOM") for approximately $15.7 million, consisting of $8.0 million in cash
and approximately 1.391.4 million shares of the Company'sour common stock. ElekomELEKOM was merged with
and into Clarus CSA, Inc., a wholly owned subsidiary of the Companyours, and the separate
existence of Elekom ceased.ELEKOM ceased (the "Merger"). Immediately following consummation of
the merger,Merger, the former holders of ElekomELEKOM common and preferred stock (the "Elekom"ELEKOM
Shareholders") owned approximately 13% of theour outstanding common stock
of the Company. Thestock. Certain
former ElekomELEKOM Shareholders have agreed not to sell any of their shares of the Company'sour
common stock for a period ending on August 6, 1999. The Company,We recorded, as additional
purchase price, recorded i)(i) payments of $500,000 made to fund the operations of ElekomELEKOM
from October 1, 1998, through the closing date, and ii)(ii) expenses of
approximately $750,000$1.0 million to complete the merger. Approximately $14.0We also recorded $10.5
million of the purchase price was recorded as purchased in-process research and development.
On May 26, 1998, the Companywe completed an initial public offering of itsour common stock in
which itwe sold 2.5 million shares for approximately $22.0 million after deducting
offering expenses and underwriting discounts.
Through 1997Our revenue consists of revenues from the Company recognized revenue in compliance with Statementlicensing of Position ("SOP")software and fees from
consulting, implementation, training, and maintenance services. Effective
January 1, 1998, we adopted SOP No. 97-2, "Software Revenue Recognition," that
supersedes SOP No. 91-1, "Software Revenue Recognition." Effective January 1, 1998,Under SOP No. 97-2, we
recognize software license revenue when the Company adopted SOP 97-2 "Software Revenue Recognition." The adoptionfollowing criteria are met:
o a signed and executed contract is obtained,
o shipment of this SOPthe product has not had a significant impact onoccurred,
o the Company's consolidated
financial statements.license fee is fixed and determinable,
o collectibility is probable, and
o remaining obligations under the license agreement are insignificant.
Revenues from software licenses have been recognized upon delivery of theour
product if there are no significant obligations on theour part of
the Company following delivery,
and collection of the related receivable, if any, is deemed probable by
management. Revenues from serviceservices fees relate to implementation, training, and
upgrade services performed by the Companyus and have been recognized as the services are
performed. Maintenance fees relate to customer maintenance and support and have
been recognized ratablyrateably over the term of the software support agreement, which
is typically
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OVERVIEW (CONTINUED)
12 months. A majority of the Company'sour customers renew the maintenance and support
agreements after the initial term. Revenues that have been prepaid or invoiced,
but that do not yet qualify for recognition under the Company'sour policies, are reflected as
deferred revenue.
Cost of license fees includes royalties and software duplication and
distribution costs. The Company recognizesWe recognize these costs as the applications are shipped.
Cost of services fees include personnel and related costs incurred to provide
implementation, training, and upgrade services to customers. These costs are
recognized as the services are performed. Cost of maintenance fees includes
personnel and related costs incurred to provide the ongoing support and
maintenance of the Company'sour products. These costs are recognized as incurred.
Research and development expenses consist primarily of personnel costs. The
Company accountsWe
account for software development costs under Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting Forfor the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed." Research and development expenses are
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Overview (continued)
charged to expense as incurred until technological feasibility is established,
after which remaining costs are capitalized. The Company definesWe define technological feasibility
as the point in time at which the Company haswe have a working model of the related product.
Historically, the costs incurred during the period between the achievement of
technological feasibility and the point at which the product is available for
general release to customers have not been material. Accordingly, the Company chargeswe charge all
internal software development costs to expense as incurred.
Sales and marketing expenses consist primarily of salaries, commissions, and
benefits to sales and marketing personnel, travel, trade-show participation,
public relations, and other promotional expenses. General and administrative
expenses consist primarily of salaries for financial, administrative and
management personnel, and related travel expenses, as well as occupancy,
equipment, and other administrative costs.
The CompanyWe had net operating loss carryforwards ("NOLs"NOL's") of approximately $24.5$27.6 million
at September 30, 1998,March 31, 1999, which begin expiring in 2007. The CompanyWe established a valuation
allowance equal to the NOLsNOL's and all other deferred tax assets. The benefits
from these deferred tax assets will be recorded when realized, which will reduce
the Company'sour effective tax rate for future taxable income, if any. DueOur ability to changes in the Company's ownership structure, the
Company's use of its NOLs as of May 26, 1998 of approximately $26.0 million will
bebenefit
from certain NOL carryforwards is limited to approximately $3.8 million in any given year to offset future
taxes. If the Company does not realize taxable income in excessunder Section 382 of the limitationInternal
Revenue Code, as we are deemed to have had an ownership change of more than 50%,
as defined. Accordingly, certain NOL's may not be realizable in future years certain NOLs will be unrealizable.
Affiliate Relationshipsdue
to the limitation.
AFFILIATE RELATIONSHIPS
In March 1995, the Company andwe, along with Technology Ventures, L.L.C. ("Technology
Ventures"), which is controlled by Joseph S. McCall, a former director of ours,
formed Clarus Professional Services, L.L.C. (formerly SQL Financial Services,
L.L.C.; the Services Subsidiary"Services Subsidiary") to provide implementation, training, and
upgrade services exclusively for the Company'sour customers. On February 5, 1998, Technology
Ventures sold its 20% interest in the Services Subsidiary to the Company. The considerationus in exchange for the 20% interest was
225,000 shares of the
Company's Common Stock,our common stock, a warrant to purchase an additional 300,000
shares of Common Stockour common stock at a price of $3.67 per share, and a non-interest
bearing promissory note in the principal amount of $1.1 million. The purchase of
the remaining 20% of the Services Subsidiary was accounted for using the
purchase method of accounting and will resultresulted in goodwill in the amount of $4.2
million, which is being amortized over 15 years.
The Company assigned a 15-year
amortization period to the goodwill acquired in the purchase of the 20% interest
in the Services Subsidiary.
In the second quarter of 1998, the Company accelerated the vesting of certain
employee stock options issued in the first quarter of 1998, for approximately
283,000 shares of Common Stock, at an exercise price of between $3.67 per share
and $8.00 per share. As a result of this accelerated vesting, the Company
recognized a non-cash, non-recurring charge of approximately $705,000 during the
quarter ended June 30, 1998, representing the previously remaining unamortized
deferred compensation recorded on these options.
Summary of the Effects of the Merger
The Company anticipates the integration and consolidation of ELEKOM will require
substantial management, financial and other resources. The acquisition of ELEKOM
involves a number of significant risks including potential difficulties in
assimilating the technologies, services and products of ELEKOM or in achieving
the expected synergies and cost reductions, as well as other unanticipated risks
and uncertainties. As a result, there can be no assurance as to the extent to
which the anticipated benefit with respect to the Merger will be realized, or
the timing of any such realization. See the Company Registration Statement
dated October 28, 1998, filed under form S-4 with the Securities and Exchange
Commission.
109
ItemITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Overview (continued)
Summary of the Effects of the Merger (continued)
The Merger is expected to lower the net earnings of the Company through 1998 as
a result of a substantial increase in amortization of intangible and other
long-lived assets and various other adjustments resulting from purchase
accounting. The 1997 unaudited pro forma condensed combined net loss before
non-recurring charges would have been approximately $10.2 million, a net loss
which is approximately 149% greater than the Company's actual historical results
for 1997. The Company believes that earnings beyond 1998 should improve as a
result of the web-based, electronic procurement market presence and recognition
afforded the Company as a result of the completion of the Merger. No assurances
can be given as to the amount or timing of such benefit that may actually be
realized or that any such growth may occur.
The Merger will be accounted for as a purchase. Under purchase accounting, the
total purchase cost and fair value of liabilities assumed were allocated to the
tangible and intangible assets of ELEKOM based upon their respective fair values
on November 6, 1998.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of OperationsMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated:
Three months ended Nine months ended
September 30 September 30
----------------------- -------------------------THREE MONTHS ENDED
MARCH 31
------------------------------
1999 1998
1997 1998 1997
Revenues:
License fees 47.1% 56.5% 45.8% 51.4%32.1% 43.8%
Services fees 36.7 27.1 36.8 30.548.3 36.9
Maintenance fees 16.2 16.4 17.4 18.1
----------------------- -------------------------19.6 19.3
------------------------------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
License fees 8.1 6.3 5.0 4.93.0 3.2
Services fees 22.7 17.9 23.5 21.029.1 25.7
Maintenance fees 7.7 6.7 7.9 7.8
----------------------- -------------------------9.0 8.2
------------------------------
Total cost of revenues 38.5 30.9 36.4 33.741.1 37.1
Operating expenses:
Research and development 13.7 19.5 13.5 30.319.2 13.8
Sales and marketing 25.4 30.9 27.4 39.629.6 30.0
General and administrative 9.8 9.9 12.1 12.014.2 16.4
Depreciation and amortization 4.4 4.6 4.8 6.07.6 4.9
Non-cash compensation 0.3 0.2 2.8 0.2
----------------------- -------------------------0.4 0.6
------------------------------
Total expenses 53.6 65.1 60.6 88.171.0 65.7
Operating income (loss) 7.9 4.0 3.0 (21.8)loss (12.1) (2.8)
Interest income 2.0 0.1 1.3 0.21.0 0.3
Interest expense 0.4 1.8 0.6 1.40.2 0.7
Minority interest 0.0 1.8 0.1 1.7
======================= =========================0.4
------------------------------
Net income (loss) 9.5 0.5 3.6 (24.9)
======================= =========================loss (11.3) (3.6)
==============================
Gross margin on license fees 82.9 88.9 89.2 90.5 92.8
Gross margin on services fees 38.1 33.8 36.0 30.939.7 30.2
Gross margin on maintenance fees 52.3 59.2 54.4 57.154.0 57.4
Quarter and Nine Months Ended September 30, 1998, Compared to Quarter and Nine
Months Ended September 30, 1997.
Revenues
Total Revenues.QUARTER ENDED MARCH 31, 1999, COMPARED TO QUARTER ENDED MARCH 31, 1998.
REVENUES
TOTAL REVENUES. For the quarter ended September 30, 1998,March 31, 1999, total revenues increased
56.9%37.7% to $11.9$11.4 million from $7.6$8.3 million in the comparable period in 1997. For the nine months ended September 30, 1998, total revenues increased
75.1% to $30.7 million from $17.5 million in the comparable period in 1997.1998. These
increases arewere attributable to a substantial increasesincrease in license fees, services fees and
maintenance fees.
License Fees.LICENSE FEES. License fees increased 30.8% to $5.6were $3.7 million, or 47.1%32.1% of total revenues, in the
quarter ended September 30, 1998,March 31, 1999, up slightly from $4.3$3.6 million, or 56.5%43.8% of total
revenues, in the comparable period in 1997. License fees increased
55.8% to $14.1 million, or 45.8% of total revenues, in the nine months ended
September 30, 1998, from $9.0 million, or 51.4%, in the comparable period in
1997. These increases1998. The increase in license fees
resulted primarily from 12
Item 2. Management's Discussion and Analysissales of Financial Condition and
ResultsClarus Commerce products, a result of Operations (continued)
Resultsour successful
introduction of Operations (continued)
Quarter and Nine Months Ended September 30, 1998, Compared to Quarter and Nine
Months Ended September 30, 1997 (continued).
Revenues (continued)
License Fees (continued)
increasesWeb-based solutions, which were offset by a decrease in the
number of licenses sold reflecting a continuing increase infor our traditional product line. This trend reflects
the demand for the Company's existing andour new applications,Clarus Commerce solutions, and to a lesser extent, to an
increase in the average
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
QUARTER ENDED MARCH 31, 1999, COMPARED TO QUARTER ENDED MARCH 31, 1998
(CONTINUED).
REVENUES (CONTINUED)
LICENSE FEES (CONTINUED)
customer transaction size.
Services Fees.size for Clarus Commerce products when compared to the
average transaction size for our traditional products.
SERVICES FEES. Services fees increased 112.5%80.3% to $4.4$5.5 million, or 36.7%48.3% of total
revenues, in the quarter ended September 30, 1998,March 31, 1999, from $2.1$3.1 million, or 27.1%36.9% of
total revenues, in the comparable period in 1997. Services1998. This increase in services fees
was primarily due to continued growth in the demand for professional services.
MAINTENANCE FEES. Maintenance fees increased 111.2%40.1% to $11.3$2.2 million, or 36.8%19.6% of
total revenues, in the nine monthsquarter ended September 30, 1998,March 31, 1999, from $5.3$1.6 million, or 30.5%19.3%
of total revenues, in the comparable period in 1997. These increases in services fees are primarily due to
increased demand for professional services associated with the1998. This increase in
number of licenses sold.
Maintenance Fees. Maintenance fees increased 55.0% to $1.9 million, or 16.2% of
total revenues, in the quarter ended September 30, 1998, from $1.3 million, or
16.4% of total revenues, in the comparable period in 1997. Maintenance fees
increased 68.9% to $5.4 million, or 17.4% of total revenues, in the nine months
ended September 30, 1998, from $3.2 million, or 18.1% of total revenues, in the
comparable period in 1997. These increases in
maintenance fees werewas primarily due to the signing of license agreements with new
customers and the renewal of maintenance with existing customers during the respective periods.
Cost of Revenues
Total Cost of Revenues.customers.
COST OF REVENUES
TOTAL COST OF REVENUES. Cost of revenues increased 95.5%52.9% to $4.6$4.7 million, or
38.5%41.1% of total revenues, in the quarter ended September 30, 1998,March 31, 1999, from $2.4$3.1 million,
or 30.9%37.1% of total revenues, in the comparable period in 1997. Cost of
revenues increased 89.5% to $11.2 million, or 36.4% of total revenues, in the
nine months ended September 30, 1998, from $5.9 million, or 33.7% of total
revenues, in the comparable period in 1997.1998. The increases in
the cost of revenues were primarily due to an increase in personnel and related
expenses and increased royalty expenses for the respective periods.
Cost of License Fees.expenses.
COST OF LICENSE FEES. Cost of license fees increased 100.8%33.1% to $960,000,$346,000, or 17.1%9.5%
of total license fees, in the quarter ended September 30, 1998,March 31, 1999, compared to
$478,000,$260,000, or 11.1%7.2% of total license fees, in the comparable period in 1997.
Cost of license fees increased 78.2% to $1.5 million, or 10.8% of total license
fees, in the nine months ended September 30, 1998, compared to $856,000, or 9.5%
of total license fees, in the comparable period in 1997.1998. The
increasesincrease in the cost of license fees, and the increase as a percentage of total
license fees, were primarily attributable to increases in the sale of
third-party software products distributed by the Company.
Cost of Services Fees.distributed.
COST OF SERVICES FEES. Cost of services fees increased 98.9%55.7% to $2.7$3.3 million, or
61.9%60.3% of total services fees, in the quarter ended September 30, 1998,March 31, 1999, compared to
$1.4$2.1 million, or 66.2%69.8% of total services fees, in the comparable period in 1997. Cost of services fees increased 95.9% to $7.2 million, or 64.0% of total
services fees, in the nine months ended September 30, 1998, compared to $3.7
million, or 69.1% of total services fees, in the comparable period in 1997.
These increases1998.
This increase in the cost of serviceservices fees arewere primarily attributable to an
increase in the personnel and related costs to provide implementation, training,
and upgrade services. 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Quarter and Nine Months Ended September 30, 1998, Compared to Quarter and Nine
Months Ended September 30, 1997 (continued).
Cost of Revenues (continued)
Cost of Services Fees (continued)
The decreasesdecrease in cost of serviceservices fees as a percentage of
revenue for the quarter and nine months ended September 30, 1998, areMarch 31, 1999, was primarily due to increased
hourly rates charged combined with increased utilization of services personnel.
Cost of Maintenance Fees.COST OF MAINTENANCE FEES. Cost of maintenance fees increased 81.4%51.4% to $925,000,$1.0
million, or 47.7%46.0% of total maintenance fees, in the quarter ended September 30, 1998,March 31,
1999, compared to $510,000,$681,000, or 40.8%42.6% of total maintenance fees, in the
comparable period in 1997. Cost of maintenance fees increased 79.6% to $2.4 million, or
45.6% of total maintenance fees, in the nine months ended September 30, 1998,
compared to $1.4 million, or 42.9% of total maintenance fees, in the comparable
period in 1997. These increases1998. This increase in the cost of maintenance fees werewas
primarily attributable to an increase in the personnel and related costs
required to provide support and maintenance. Cost of maintenance fees as a
percentage of total maintenance fees increased during the respective periods primarily due to increased
investment in personnel costs to support the maintenance customer base.
Research and DevelopmentRESEARCH AND DEVELOPMENT
Research and development expenses increased 10.1%92.0% to $1.6$2.2 million, or 13.7%19.2% of
total revenues, in the quarter ended September 30, 1998,March 31, 1999, from $1.5$1.1 million, or 19.5%13.8%
of total revenues, in the comparable period in 1997. Research and
development expenses decreased 21.6% to $4.2 million, or 13.5% of total
revenues, in the nine months ended September 30, 1998, from $5.3 million, or
30.3% of total revenues, in the comparable period in 1997.1998. Research and development
expenses increased during the quarter ended September 30, 1998,March 31, 1999, primarily due to
increased personnel costs related to continued development of the Company'sour products.
Research and development expenses decreased during the
nine months ended September 30,11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
QUARTER ENDED MARCH 31, 1999, COMPARED TO QUARTER ENDED MARCH 31, 1998
primarily due to decreased personnel and
contractor fees related to the effort required in 1997 to develop the Denver
Release, which was substantially completed by September 1997. The decreases in
research and development as a percentage of revenue for the periods ended
September 30, 1998, compared to the periods ended September 30, 1997, are
primarily due to the completion of the Denver Release, coupled with the
economies of scale realized through the growth in the Company's revenue. The
Company intends to continue to devote substantial resources toward research and
development efforts.
Sales and Marketing(CONTINUED).
SALES AND MARKETING
Sales and marketing expenses increased 28.7%35.6% to $3.0$3.4 million, or 25.4%29.6% of total
revenues, in the quarter ended September 30, 1998,March 31, 1999, from $2.4$2.5 million, or 30.9%30.0% of
total revenues, in the comparable period in 1997. Sales and marketing
expenses increased 21.0% to $8.4 million, or 27.4% of total revenues, in the
nine months ended September 30, 1998, from $7.0 million, or 39.6% of total
revenues, in the comparable period in 1997.1998. The increasesincrease in sales and
marketing expenses werewas primarily attributable to the costs associated with
additional sales and marketing personnel and promotional activities.
The decreases in sales
and marketing expense, as a percentage of revenues for the respective periods,
reflects the higher productivity derived from the Company's sales force and
marketing efforts.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Quarter and Nine Months Ended September 30, 1998, Compared to Quarter and Nine
Months Ended September 30, 1997 (continued).
General and AdministrativeGENERAL AND ADMINISTRATIVE
General and administrative expenses increased 55.8%19.3% to $1.2$1.6 million, or 9.8%14.2% of
total revenues, in the quarter ended September 30, 1998,March 31, 1999, from $754,000,$1.4 million, or 9.9%16.4%
of total revenues, in the comparable period in 1997. General and administrative
expenses increased 77.0% to $3.7 million, or 12.1% of total revenues, in the
nine months ended September 30, 1998, from $2.1 million, or 12.0% of total
revenues, in the comparable period in 1997.1998. The increasesincrease in general and
administrative expenses werewas primarily attributable to increases in personnel and
related costs.
The Company believes that its general and administrative
expenses will continue to increase in future periods to accommodate anticipated
growth and expenses associated with its responsibilities as a public company.
Depreciation and AmortizationDEPRECIATION AND AMORTIZATION
Depreciation of tangible equipment and amortization of intangible assets
increased 49.4%115.6% to $526,000,$871,000, or 4.4%7.6% of total revenues, in the quarter ended
September 30, 1998,March 31, 1999, from $352,000,$404,000, or 4.6%4.9% of total revenues, in the comparable
period in 1997. Depreciation of tangible equipment and amortization of
intangible assets increased 38.8% to $1.5 million, or 4.8% of total revenues, in
the nine months ended September 30, 1998, from $1.0 million, or 6.0% of total
revenues, in the comparable period in 1997.1998. The increasesincrease in depreciation and amortization expense arewas due to
increasesan increase in capital expenditures resulting from
the significant growth of the Company combined with increased goodwill resulting from the acquisition of the minority interestELEKOM Corporation in
the Services Subsidiary.
Non-Cash Compensation
Non-cash compensation expensefourth quarter of 1998.
OTHER INCOME
Interest income increased to $38,000, or 0.3% of total revenues,$117,000 in the quarter ended September 30, 1998,March 31, 1999, from
$13,000, or 0.2% of total
revenues,$30,000, in the comparable period in 1997. Non-cash compensation expense
increased1998. The increase in interest income was
primarily due to $842,000, or 2.8% of total revenues, in the nine months ended
September 30, 1998, from $36,000, or 0.2% of total revenues in the comparable
period in 1997. Increased levels of unamortized deferred non-cash compensation,
relative to certain stock options awarded in the first quarter of 1998, providedadditional cash available for the increased non-cash compensation expenseinvestment in the quarter ended
September
30, 1998. Additionally, in the second quarter of 1998, the Company accelerated
the vesting of certain employee stock options issued in the first quarter of
1998, for approximately 283,000 shares of Common Stock, at an exercise price of
between $3.67 per share and $8.00 per share. As a result of this accelerated
vesting, the Company recognized a non-cash, non-recurring charge of
approximately $705,000 during the quarter ended June 30, 1998, representing the
previously remaining unamortized deferred compensation recorded on these
options. The recognition of the non-cash, non-recurring charge provided for the
increases in the non-cash compensation expense in the nine months ended
September 30, 1998, when compared to the same period of the prior year.
Other Income
Interest income increased to $243,000 in the quarter ended September 30, 1998,
from $1,000, in the comparable period in 1997. Interest income increased to
$402,000 in the nine months ended September 30, 1998, from $28,000, in the
comparable period in 1997. On May 26, 1998, the Company completed an initial
public offering of its common stock in which it sold 2.5 million shares, which
resulted in net proceeds of approximately $22.0 million. The increases in
interest income were primarily due to the results of the investment of the funds
from the initial public offering.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Quarter and Nine Months Ended September 30, 1998, Compared to Quarter and Nine
Months Ended September 30, 1997 (continued).
Interest Expense
Interest expense decreased 61.7% to $51,000 in the quarter ended September 30,
1998, from $133,000 in the comparable period in 1997. Interest expense also
decreased 31.5% to $172,000 in the nine months ended September 30, 1998, from
$251,000 in the comparable period in 1997. These decreases are primarily due to
lower average levels of debt in the periods ended September 30, 1998, as
compared to the periods ended September 30, 1997.
Minority Interest
Minority interest decreased 100.0% in the quarter ended September 30, 1998, from
$133,000 in the comparable period in 1997. Minority interest decreased 88.8% to
$36,000 in the nine months ended September 30, 1998, from $322,000 in the
comparable period in 1997. These decreases in minority interest are related to
the purchase of the remaining 20% of the Services Subsidiary on February 5,
1998, which eliminated the minority interest related to the Services Subsidiary.
Income TaxesMarch 31, 1999.
INCOME TAXES
As a result of the operating losses incurred since the Company'sour inception, the
Company haswe have not
recorded any provision or benefit for income taxes in the quarter ended March
31, 1999 and nine month periods ended September 30, 1998, and 1997, respectively.
Liquidity and Capital ResourcesLIQUIDITY AND CAPITAL RESOURCES
On May 26, 1998, the Companywe completed itsour initial public offering of 2.5 million shares
of its Common Stockour common stock at an offering price of $10.00 per share. The proceeds, net
of expenses, from this public offering of approximately $22.0 million were
placed in investment grade cash equivalents. The Company'sOur working capital position (deficit) was
$20.9$7.2 million and $(453,000)$9.0 million at September 30,
1998March 31, 1999 and December 31, 1997,1998,
respectively. Management believesWe believe that current cash balances and cash flows from
operations will be adequate to provide for the
Company'sour capital expenditures and working
capital requirements for the forseeable future. Although operating activities
may provide cash in certain periods, to the extent the Company experienceswe experience growth in the
future, itsour operating and investing activities may use significant cash.
On November 6, 1998, the Companywe completed the acquisition of Elekom Corporation
("Elekom")ELEKOM for approximately
$15.7 million, consisting of $8.0 million in cash and approximately 1.391.4 million
shares of the Company'sour common stock. ElekomELEKOM was merged with and into Clarus CSA, Inc.,
aour wholly owned subsidiary of the Company and the separate existence of ElekomELEKOM ceased.
Immediately following consummation of the merger,Merger, the former holders of Elekom common and preferred stock (the
"Elekom Shareholders")ELEKOM Shareholders
owned approximately 13% of theour outstanding common stock
of the Company.stock. The former ElekomELEKOM
Shareholders have agreed not to sell any of
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
their shares of the Company'sour common stock for a period ending on August 6, 1999. The Company asAs
additional purchase price, we recorded i) payments of $500,000 made to fund the
operations of ElekomELEKOM from October 1, 1998, through the closing date, and ii)
expenses of approximately $750,000$1.0 million to complete the merger. Approximately
$14.0$10.5 million of the purchase price was recorded as purchased in-process
research and development.
Cash used in operating activities was approximately $1.5$2.7 million and $3.3$1.1
million during the nine monthsquarter ended September 30,March 31, 1999 and 1998, and 1997, respectively. Cash
used by operations during the nine monthsquarter ended September 30,
16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
1998,March 31, 1999, was primarily
attributable to an increase in accounts receivable, partially offset by an increaseand a decrease in accounts
payable and accrued liabilities. Cash used by operations during the nine monthsquarter
ended September 30, 1997,March 31, 1998, was primarily attributable to an increasea decrease in accounts receivable,deferred
revenue, partially offset by increasesa decrease in deferred revenues and accounts payable and accrued liabilities.receivable.
Cash used in investing activities was approximately $2.6$1.5 million and $647,000$727,000
during the ninethree months ended September 30,March 31, 1999 and 1998, and 1997, respectively. The cash
used in investing activities during the nine monthsquarter ended September 30,March 31, 1999 and 1998,
was primarily attributable to purchases of computer equipment and software and
an increase in intangible assets and costs related to the acquisition of
Elekom. The cash used in investing activities during the nine months ended
September 30, 1997, was primarily attributable to purchases of computer equipment and software.
Cash providedused by financing activities was approximately $20.8 million$197,000 during each of the
three month periods ended March 31, 1999 and $5.4
million during the nine months ended September 30, 1998 and 1997, respectively.1998. The cash providedused by financing
activities during the ninethree months ended September
30,March 31, 1999, was primarily
attributable to the repayment of long-term borrowings. The cash used by
financing activities during the three months ended March 31, 1998, was primarily
attributable to payment of dividends and the Company's initial public offering
effective May 26, 1998, for net proceedsrepayment of approximately $22.0 million. The
cash providedlong-term borrowings,
offset by financing activities during the nine months ended September 30,
1997, was primarily attributable to proceeds from the issuance of preferred stock of approximately $6.0 million, and notes payable and short term borrowings
of approximately $29.8 million; offset by payments on notes payable and short
term borrowings of approximately $30.2 million.stock.
In March 1997, the Companywe entered into a loan agreement and a master leasing agreement
for an equipment line of credit in the amount of $1.0 million (the "Equipment
Line") with a leasing company. The Equipment Line bears interest at rates
negotiated with each loan or lease schedule (generally 22.0% to 22.5%) and is
collateralized by all of the equipment purchased with the proceeds thereof. As
of September 30, 1998,March 31, 1999, the principal balance on the Equipment Line payable was
$515,000.
The Company has$437,000.
We have a revolving working capital line of credit and equipment facility with
Silicon Valley Bank. Borrowings outstanding under the line are limited to the
lesser of $3.0 million or 80% of accounts receivable. Borrowings outstanding
under the equipment facility are limited to $1.0 million. Interest on the
revolving credit facility is at prime rate and on the equipment facility at
prime plus 0.5% and is collateralized by all of the assets of the Company.our assets. The line of credit
and equipment term facility with Silicon Valley Bank will expire on April 29,May 31,
1999. As of September 30, 1998, the CompanyMarch 31, 1999, we had no outstanding balance and had $3.5$3.7 million
available for future borrowings under this agreement.
The CompanyWe had available NOL'snet operating loss carryforwards ("NOL's") of approximately $24.5$27.6 million
as of September
30, 1998, to reduce future income tax liabilities. These NOL's expire from 2007
through 2012 and are subject to review and possible adjustment by the
appropriate taxing authorities. Pursuantat March 31, 1999, which begin expiring in 2007. We established a valuation
allowance equal to the Tax Reform ActNOL's and all other deferred tax assets. The benefits
from these deferred tax assets will be recorded when realized, which will reduce
our effective tax rate for future taxable income, if any. Our ability to benefit
from certain NOL carryforwards is limited under Section 382 of 1986, the utilization of NOL's for tax purposes may be subjectInternal
Revenue Code, as we are deemed to have had an annual limitation if
a cumulativeownership change of ownership of more than 50% occurs over a three-year
period. As a result of this limitation, the Company will,
as defined. Accordingly, certain NOL's may not be limitedrealizable in future years due
to the use
of its NOL's in any given year. The Company had net deferred tax assets of
approximately $9.4 million at September 30, 1998, comprised primarily of net
operating loss carryforwards. The Company has fully reserved for these deferred
tax assets.
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Actlimitation.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT
This quarterly report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. When used
in this report, the words "believes," "expects," "anticipates," "estimates" and
similar words and expressions are generally intended to identify forward-looking
statements.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT (CONTINUED)
Statements that describe the Company'sour future strategic plans, goals, or objectives are
also forward-looking statements. Readers of this report are cautioned that any
forward-looking statements, including those regarding the
17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act (continued)our intent, belief or
current expectations, of the Company or management, are not guarantees of future performance, results or
events and involve risks and uncertainties, and that actual results and events
may differ materially from those in the forward-looking statements as a result
of various factors including, but not limited to, (i) general economic
conditions in the markets in which the Company operates,we operate, (ii) competitive pressures in the
markets in which the Company operates,we operate, (iii) the effect of future legislation or
regulatory changes on the Company'sour operations and (iv) other factors described from time
to time in the Company'sour filings with the Securities and Exchange Commission. The
forward-looking statements included in this report are made only as of the date
hereof. The Company undertakesWe undertake no obligation to update such forward-looking statements to
reflect subsequent events or circumstances.
Impact of YearIMPACT OF YEAR 2000
The Company hasWe have designed and tested the most current versions of itsour products to be Year
2000 compliant. There can be no assurances that the Company'sOur current products do notmay contain undetected errors or defects
associated with Year 2000 date functions that may result in material costs to
the Company.us. Some commentators have stated that a significant amount of litigation will
arise out of Year 2000 compliance issues, and the Company iswe are aware of a growing number
of lawsuits against other software vendors. Because of the unprecedented nature
of such litigation, it is uncertain whether or to what extent the Companywe may be affected
by it.
The Company isWe are in the process of determining the extent to which third-party licensed
software distributed by the Companyus is Year 2000 compliant, as well as the impact of any
non-compliance on the Companyus and itsour customers.
Additionally, in the event relational database management systems used with the
Company'sour
software are not Year 2000 compliant, there can be no assurance that
Company'sour customers willmay not be able to continue
to use the Company'sour products. The
Company doesWe do not currently believe that the effects of any Year
2000 non-compliance in the Company'sour installed base of software will result in a material
adverse impact on the Company'sour business or financial condition. However, the Company's investigation with respect to third-party software is in
its preliminary stages, and no assurance can be given that the Company will notwe may be
exposed to potential claims resulting from system problems associated with the
century change or that suchchange. Such claims would not have a material adverse effect on the Company'sour
business, financial condition, or results of operations.
With respect to itsour internal systems, the Company iswe are taking steps to prepare itsour systems
for the Year 2000 date change. The Company expects toWe have substantially completecompleted our inventory
efforts during the first quarter of calendar year 1999, withefforts. We expect remediation and testing efforts to continue through the third
quarter of 1999. Although
the Company doesWe estimate that costs for Year 2000 compliance efforts will
not exceed $150,000. We do not believe that itwe will incur any material costs or
experience material disruptions in itsour business associated with preparing itsour
internal systems for the Year 2000, there can be no assurances that the Company will not
experience2000. However, unanticipated negative consequences
and/or material costs caused by undetected errors or defects in the technology
used in itsour internal systems. The
Company issystems could be experienced. We are currently unable to
estimate the most reasonably likely worst caselikley worst-case effects of the year 2000 and does notYear 2000. We are
currently have apreparing contingency plan in placeplans for any such unanticipated negative
effects.
The Company isWe are currently unable to estimate whether it iswe are exposed to significant risk
of being adversely affected by Year 2000 noncompliancenon-compliance by third parties. The Company isWe are
contacting third parties with which it haswe have material relationships, including
itsour material customers, to attempt to determine their preparedness with respect
to Year 2000 issues and to analyze the risks to the
Companyus in the event any such third
parties experience significant business interruptions as result of Year 2000
noncompliance. The Company expectsnon-compliance. We expect to complete this review and analysis and to determine
the need for contingency planning in this regard by June 30, 1999.
1814
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Company filed a Form S-1 Registration Statement (Registration
No. 333-63535) in connection with its initial public offering that
was effective on May 26, 1998. On November 6, 1998, the Company used
approximately $8.0 million of the proceeds from its initial public
offering as a portion of the purchase price of Elekom Corporation.
ItemITEM 6. Exhibits and Reports on FormEXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Plan of Reorganization dated August 31, 1998,
by and among Clarus Corporation, Clarus CSA, Inc. and Elekom
Corporation (Incorporated by reference from Exhibit 2.1 and
Appendix A of the Company's Registration Statement on Form
S-4 (Registration No. 333-63535)).
2.2 Escrow and Minority Investment Agreement by and between the
Registrant and and Elekom Corporation and US Bank Trust
National Association (Incorporated by reference from Exhibit
2.2 to the Company's Registration Statement on Form S-4
(Registration No. 333-63535)).
4.1 Specimen Stock Certificate (Incorporated by reference from
Exhibit 4.2 to the Company's Registration Statement on Form
S-4 (Registration No. 333-63535)).
4.2 Voting Agreement by and among the Registrant and certain
shareholders of Elekom Corporation (Incorporated by reference
from Exhibit 4.3 to the Company's Registration Statement on
Form S-4 (Registration No. 333-63535)).
4.3 Registration Rights Agreement by and between the Registrant
and certain shareholders of Elekom Corporation.
4.4 Escrow and Indemnity Agreement by and among the Registrant,
Elekom Corporation and certain shareholders of Elekom
Corporation.
2727.1 Financial Data Schedule
(b) Reports on Form 8-K The Company filed a current report on Form 8-K on September 4, 1998,
to report that it had entered into an Agreement and Plan of
Reorganization with Elekom Corporation.
19- None
15
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CLARUS CORPORATION
(Registrant)
Date: November 16, 1998May 14, 1999 By: /s/William A. Fielder, III
---------------- --------------------------------------------------- ------------------------------------
William A. Fielder, III
Chief Financial Officer and Treasurer
2016